Rebecca Lynn White is a director in Western Reserve Partners' Industrial Group. She focuses on mergers and acquisitions, capital raising and bankruptcy and restructuring transactions.

This week, America will celebrate another year of independence on the Fourth of July with cookouts and fireworks. As Americans, we value our freedom and the ability to make our own choices. But how does a business owner who needs capital maintain his or her independence?Often times, business owners need additional capital to grow their businesses or pay themselves a well-deserved dividend, but are not yet ready for retirement. For those business owners who want to stay in control and continue operating their business, selling and relinquishing control of their business to a strategic buyer or private equity firm is not an appealing option. In these instances, a minority capital raise might be the solution. Depending upon the amount of capital needed and the company's current debt level, business owners can achieve their goal by raising senior debt and/or mezzanine capital. The mezzanine market is actively seeking new investment opportunities and can be a very attractive financing alternative for business owners, given current interest rates. With the lack of sell-side mergers and acquisitions, mezzanine investors who typically assist private equity firms in financing their transactions have seen a significant drop in their deal volume, yet are faced with many of the same pressures of putting money to work within a set timeframe. Lending rates are already near historic lows, but the lack of deals in the market creates competition, resulting in further reductions in spreads and pricing.Mezzanine capital can be structured in a variety of ways, but typically consists of subordinated notes or preferred stock. There are a variety of mezzanine investors who often are creative in how they structure their financings, as long as they achieve a specific rate of return. This return is often achieved through a combination of the following:

Cash interest: Monthly or quarterly payments of cash based on the outstanding balance of the principal

Payable-in-Kind (PIK) interest: Monthly or quarterly payments achieved by increasing the amount of the principal

Warrants: A security often attached to the subordinated debt or preferred stock, which enables the warrant holder to purchase the underlying stock at a fixed priceRaising capital in this manner is typically cheaper than selling equity in a business and allows the business owner to retain majority control of the company. Mezzanine financing can afford business owners the following:

Growth capital for making an acquisition, opening a new facility or expanding internationally

Capital for buying out a business partner. Depending on the capital structure, a minority-share partner can even buy out a majority partner and gain majority control of the business.

Dividends. This diversifies shareholder net worth by taking some money out of the business for personal needs or alternative investments.Mezzanine financing partners typically have a lesser degree of involvement in a company than a private equity firm, given their position in the capital structure. They often will require a board seat or two, but not control of the board. Mezzanine investors typically will not have any operating control, but will have a few negative controls, enabling them to prevent a sale of the business or a significant amount of capital expenditures without their consent. These are typically not cumbersome to most business owners.Often, mezzanine investors bring benefits to a company, such as:

Efficient access to capital. Minority capital raises typically take less time than a traditional sale process and often can be completed in two to four months, depending on the level of capital required.

Operational advice through operating partners, consultants and relationships with other companies in their portfolio

Better financial controls and more formal reporting packages

Halo effect. Institutional investors bring a “stamp of approval” to companies seeking to sell to private equity firms or into the public markets.An investment banker can help you determine the appropriate capital structure for your business needs, identify the right mezzanine partner for your organization and negotiate the terms and conditions of the financing. The financing can be structured as a longer-term financing solution, as most mezzanine investors will continue to provide additional capital as needed to support the company's growth, which can make for a great business partnership.

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